As big banks stay stingy with mortgage money, small community banks fill in the gaps

More people are turning to smaller banks for mortgages as the big banks keep… (iStockphoto )

January 24, 2014

As the largest banks in the country lose market share in the residential lending sector, small community banks are picking up the slack. According to some experts, that's good for the economy and the homebuyer.

Part of the reason is that the biggest banks dominate the refinance industry, and refinancing activity has declined a great deal.

Walter Molony, economic spokesman for the National Association of Realtors, suggests that large banks should start lending more.

"Credit is too tight," he says. "There's been a lot of money sitting in the banks not being lent productively."

With the average credit score of an approved conventional loan hovering at 760, up from 720 in the fall of 2013, Molony says small lenders have been filling in the gaps when possible.

"The big lenders are risk-averse and they're sitting on tons of cash," Molony says.

Wells Fargo and JPMorgan Chase rank one and two in the mortgage origination business. Together they run 28 percent of the market.

In 2012, lenders wrote more than $500 billion in mortgages, about 75 percent of which were refinances. In 2013, that percentage dropped to 53 and is expected to fall as low as 34 percent next year.

Small Banks Step Up

As the market shifts from refinancing to purchasing, the community banks are building momentum.

"We've been expecting this occur," Molony says. He says the shift to community banks is good news for homebuyers and small business owners, homebuilders in particular.

By focusing on customer service, local market expertise and small businesses, community banks are reaching out to customers who were abandoned during the housing market collapse.

When local banks thrive, communities prosper, says Stacy Mitchell, director of the community banking initiative at the Institute for Local Self-Reliance in Washington, D.C. She says the "fortunes of local banks and credits unions are intimately tied to the fortunes of their local communities."

The primary goal of a community bank is to turn local deposits into loans for the community. "Loan approvals and other key decisions are made locally by people who live in the community, have face-to-face relationships with their customers and understand local needs."

Cyclical Benefits

Many of the nation's homebuilders are small business owners. Those builders have been watching the market cry out for additional inventory but lacked the construction loans to add the necessary new housing stock.

"Banks now have an incentive to lend," Molony says.

Once builders are able to obtain construction loans, they can build more homes and create needed jobs in the community. The National Association of Home Builders in a Jan. 7 news release mentions that pent-up housing demand is likely to push the gradual improvement of the housing industry.

Fannie Mae issued a report in December detailing the shifting mortgage market. The report found only five of the top 20 single-family mortgage lenders that were in business in 2006 were still writing mortgages in 2013.

While Fannie Mae gives small banks credit for capturing market share, the report warns the shift is temporary and just a cyclical occurrence, not a game changer.